Abbott 401(k) program to help employees who have student debt could become national model

Stacey Wescott / Chicago Tribune

Abbott Laboratories is seen June 25, 2018, in Chicago's northern suburbs. The company helps employees with student loan debt by ensuring they get an employer contribution in their 401(k) accounts if they are paying off their loans.

Abbott Laboratories is seen June 25, 2018, in Chicago's northern suburbs. The company helps employees with student loan debt by ensuring they get an employer contribution in their 401(k) accounts if they are paying off their loans. (Stacey Wescott / Chicago Tribune)

A new perk at Abbott Laboratories that helps employees save for retirement even as they pay down student debt has caught the attention of a national employer group that is asking the government to clear the way for more companies to offer a similar benefit.

Abbott had sought and received the blessing of the Internal Revenue Service for a program that would allow workers who direct a certain amount of their paycheck toward student loan repayments to still get an employer contribution in their 401(k) retirement accounts, even if the workers don’t contribute themselves.

On Wednesday, the ERISA Industry Committee, which advocates on behalf of large employers regarding benefit plans governed by the Employee Retirement Income Security Act, sent a letter to the IRS commending the agency for its ruling. The IRS did not name the company when it publicly released its ruling in August, but Abbott confirmed it was the employer that had requested and received the ruling.

Because the IRS ruling applied only to Abbott, the ERISA group wants the agency to issue a broader ruling that would make the guidance generally applicable, a move that could encourage more employers to implement similar programs.

“Many employers recognize the burden that student loan debt can have on their workers’ ability to save for retirement and would like to help these workers,” Will Hansen, senior vice president of retirement policy for the group, wrote in the letter. “However, while we believe that current law allows employers to make contributions to their retirement plans on behalf of workers who repay student loan debt, the IRS has yet to clearly articulate that such contributions will not affect the tax-qualified status of an employer’s retirement plan.”

The IRS declined to comment on whether it was considering issuing broader guidance.

Student loan help has become a hot issue in employee benefits, but many employers who wish to offer it don’t know the best way to go about it, said Jeffrey Holdvogt, a partner in the employee benefits practice at McDermott Will and Emery. Most employers with a student loan perk make monthly cash payments against an employee’s debt to the loan holder, typically about $100 per month, but those payments are taxed.

Abbott’s program is unique because the employer makes a tax-free contribution to an employee’s 401(k) on the condition that the employee make student loan payments. Holdvogt said it was the first time he has heard of the IRS approving of contributions being conditioned on an employee doing something independent of the retirement plan.

The benefit doesn’t generally cost the employer any more, because the company would expect to match an employee’s 401(k) contributions anyway, he said.

The thumbs-up the IRS gave the program “is quite likely to kick-start a lot of interest from other employers and potentially be something that really causes a change in the way employers provide these types of benefits,” Holdvogt said.

The rising cost of college, as well as rising admissions, has caused student debt to triple nationally since 2005. In Illinois, more than 60 percent of students who graduate college have student debt, with an average bill of nearly $30,000, and those struggling to pay it off forgo critical years of saving. College graduates with student loans have retirement assets that are 50 percent lower than their peers without debt by age 30, and it can be difficult to catch up, according to a June report from the Center for Retirement Research at Boston College.

At Abbott, which started enrolling employees in the voluntary program this month, any U.S. employee who devotes at least 2 percent of his or her paycheck to paying off student loans can get a 5 percent 401(k) contribution from Abbott. That’s the same percentage match given to employees who contribute 2 percent to their 401(k)s. The program will allow people to accumulate savings in their retirement accounts without committing any of their own money.

The medical device manufacturer, which is based in the north suburbs, said a couple of hundred people have signed up for the program so far and it anticipates several thousand will eventually take advantage of it.

“Student loan debt is one of the biggest financial concerns in the U.S. today and we’re thrilled we’ve been able to address this issue for our employees in an innovative, meaningful way,” Steve Fussell, executive vice president of human resources, said in an emailed statement. “We’re proud to be pioneers in this space and hopeful we may have paved a pathway for more companies to help employees with this crushing problem.”

While other companies wishing to offer the same benefit could also request an individual ruling from the IRS to protect them from questions down the road, having broader guidance affirming the legality of the practice would open the door wider, said Holdvogt. The letter from the ERISA industry group is a first step toward pushing the agency in that direction.

“The more interest there is, the more groups submit requests, the more likely it is the IRS will issue guidance,” Holdvogt said. “They want to be helpful.”